Legal News for UK Co-ops and Mutuals

This is a blog where brief information about developments in UK Co-op and mutual law will be reported. Readers of this blog will also find Linda Barlow's Co-operatives UK Blog at http://www.uk.coop/blogs/linda.barlow helpful. For an network of academics working on co-ops, mutuals and social enterprises visit http://blogs.kent.ac.uk/r-comuse/2012/09/welcome-to-r-comuse/

Sunday, December 22, 2013

Co-op Bank Now Demutualised but Name Debate Continues

On Friday, phase 1 of the deal to rescue and demutualise the Co-op Bank was finalised. It was supported at all necessary meetings of classes of creditor and shareholder and approved by the Court. Effective majority control of the Bank has now passed to investors with the issue of new ordinary shares and the cancellation of the Group's existing shares.

However, the question of the Bank's continued use of the word "Co-operative" in its name remains open. Back in early November when the basic effects of the deal were announced, I expressed my views and outlined the relevant legal provisions about its continued use of the word "Co-operative" in its name.

That led to Letters in the print edition of the Co-op News of 19.11.13 to 03.12.13 from my old mate, Iain Williamson, fellow Co-op news scribbler and secretary of the Co-operative Press, and Brian Taylor, long time co-op activist and employee, arguing that it's OK for the name to be used by a PLC 70% owned by investors.

Some readers of this blog may not subscribe to the paper edition of the Co-op News. So here's my reply to Iain and Brian, published in the print edition of 03.12.13 to 17.12.13:

"23rd November 2013

Dear Sir,

Co-op Bank, Co-op Group, The Name and the Brand

Please allow me to respond to the letters that appeared in the print version of the Co-op News of 19th November to 3rd December from Iain Williamson and Brian Taylor.

First, I heartily agree with Iain Williamson's comments on the Bank rescue and the current Group CEO. The leadership shown by Mr Sutherland and the job that he and his colleagues have done in seeking to rescue what they can from the Bank disaster is excellent. They had a very poor hand in the negotiations and played it very well. We must all hope and pray that the recapitalisation plan is supported by the necessary majorities of each class of creditor and by the preference shareholders on 11th December when they meet.

I also agree with Brian Taylor's comments on the importance of the “Co-operative” brand and its value as an intangible asset, although I think he may have overstated the effect on the share price of a suitable name change for the Bank within a year or two of the recapitalisation.

However, the argument of Messrs Williamson and Jones that the Bank never was a co-operative is disingenuous. While the legal entity of the Bank has long been a PLC, the Co-op Group has always argued that the whole “family of businesses” is one Co-operative family. That was based on the Group’s status as a bona fide co-operative owned and controlled by its corporate and individual co-operative members and, crucially, its 100% ownership of the Bank PLC and the Co-operative Insurance Society.

That is a wholly different situation from the retention of the name “Co-operative” by a Bank 70% owned by stock market investors. This new situation is a long way down a slippery slope. The recapitalisation deal actually permits the continued use of the name if the Group's stake reduces to 20% and the stake of the investors rises to 80%. The Group is already legally committed not to use the word “co-operative” or any similar word in conjunction with the word “bank” for many years. That disposal of an aspect of the brand was presumably a necessary price for retaining a 30% stake in the Bank and getting the constitutional entrenchment of ethical values. That is certainly in the interests of all the stakeholders in both the Bank and the Group.

However, the Group is neither the whole UK Co-operative Movement nor the whole global Co-operative Movement. That wider interest requires that only organisations which conform with the ICA definition should be regarded as co-operatives. In many countries that is legally achieved by preventing the use of the name by any entity not registered under a specific Co-operative Law. In the UK we have the flexible and liberal approach of allowing co-operatives to use any business structure that they wish. However, the restriction on the use of the name “co-operative” by business structures other than I & P societies is the legal price paid for that. As I have noted elsewhere, the restriction only applies to new company registrations but there is power to prohibit the use of a misleading name at any time in a company’s life. That explains Paul Gosling’s observation on page 4 of the same issue of the News that a change of name ordered under those provisions is listed in the Prospectus as a risk factor for investors. That shows that the point is not merely “academic”. It is with a heavy heart that I re-emphasise this issue because it is obviously one that is irritating and worrying for the Bank and Group Executives and Boards.

However, the wider interests of cooperatives cannot be ignored and BIS is the ultimate guardian of those interests in this situation as it is the only agency that can force a change. Surely consideration of a transition to another “ethical” name for the Bank within the next couple of years would be helpful to all the bank’s stakeholders - especially the investors who may well have rescued it from oblivion. Such an approach might also help to deal with any process by BIS that results from complaints about the use of the name and could help to avoid an abrupt forced name change. I appreciate that any change will have be made some time after the recapitalisation plan has been carried out, as the unfettered use of the name by the Bank is the basis on which next month’s votes take place.

I hope that I am acting as a critical friend on this. As Daren Hale implies in his letter on the same page of the News as Brian Taylor’s, an absence of critical debate may have contributed to the development of these problems. We should all try to prevent any repetition of that by encouraging more robust, better informed and sympathetic debate as well as more thorough scrutiny by members and the press of management and boards.

Yours faithfully,

Ian Snaith"

Vince Cable has indicated that, if complaints are received, he will consider requiring that the name no longer be used. That possibility was highlighted in the Bank prospectus as a risk for investors. Surely it is time for the Bank to look at phasing out the use of the word "Co-operative" in the name to deal with that risk?

Sunday, December 01, 2013

Co-op Bank and Co-op Group: At Last Some Good News!

On Friday, the first stage of the recapitalisation plan for the Co-op Bank got massive support from the retail investors most at risk of not meeting the special majorities needed to get the plan approved.

“The Co-operative Group and The Co-operative Bank are delighted at the overwhelming levels of support for the Liability Management Exercise at this critical juncture, and we would like to thank all our bondholders and Preference Share holders for backing the Recapitalisation Plan. Based on the votes received so far, we expect the proposals to be approved at the meetings of the holders of the Preference Shares, 13% Bonds and 5.5555% Bonds on 11 December 2013. Successful completion of the Liability Management Exercise is also dependent on the success of the Scheme - holders of the Dated Notes are currently due to vote on the Scheme on 11 December 2013. We are now highly confident that our £1.5 billion Recapitalisation Plan for The Co-operative Bank can be achieved.” - Statement of 29.11.13

This means that the next stages of the Liability Management Exercise part of recapitalisation and demutualisation of the Bank should go ahead without problems.

The demutualisation of the Bank is sad but this outcome should prevent the Bank from entering "resolution" bank insolvency proceedings. That lifts the threat to the Group of liability on cross-defaults triggered by a bank insolvency.